No. 313: The Secret Sauce

On McDonald’s, Uber Eats, and the effort to systemize last mile commerce in food retail. On a Wednesday night at home, I was looking to repeat order a frequent order at a local restaurant. For years, it’s been my go-to for a healthy dinner. Ohio’s Northstar Cafe is a fixture within the community, the food is great and trustworthy. It’s the rare meal that tastes great when delivered. But on that day, it was no longer present within the Postmates app. Neither were my second and third choices. A Postmates faithful, I chose to walk to a local restaurant instead. There is something interesting happening in the food delivery space. Vendor fragmentation is increasing and companies like Postmates and DoorDash seem to be positioning for their own eventual exits. Let me explain.

A four or five star hotel would prefer that you booked through their own channels rather than booking through HotelTonight. After polling 72 hotels that use HotelTonight, 2PM found that only nine viewed the partnership as “very positive”, the majority characterized the partnership as “fair.” The order communications between HotelTonight (now Airbnb) and the hotel venue is still analog and far from instantaneous (some hotels receive confirmation via fax). HotelTonight receives a margin of the sale that many hotels don’t believe should go to the booking app. This is also how many restaurants view food delivery apps. And rather than cooperate with Postmates, GrubHub, DoorDash or others – these restaurants often ask removal from the app or close their businesses to internet orders. Uber has found multiple solutions for this supply and demand issue. From No. 293:

By building digitally vertical restaurants, Uber has gained the ability to engineer product loyalty that competing platforms cannot yet compete against. Uber Eats’ explosive growth between 2017 and 2018 is a result of the logistics company incentivizing its regular drivers to become delivery hands and also by incentivizing Uber users to become Uber Eats users. By increasing supply and demand-side economics, Uber Eats has leverage to that Postmates cannot yet manufacture. This is essential when approaching existing restaurants and offering them a private label product opportunity.

This is just one of two recent developments in Uber’s competition for delivery market share. The partnership between McDonald’s and Uber may be one of the consequential deals in all of eCommerce by the end of 2019. Uber will provide the logistics to help McDonald’s build an efficient and sustainable direct-to-consumer sales business. This is a sales effort that both companies will need. Uber’s deal with McDonald’s will lay the groundwork for, what I believe will be the race to land exclusive restaurant deals. Here is a wonderful deep dive into Uber’s unit economics by Aswath Damodaran. A standout excerpt:

The first is that Uber is not a pure ride sharing company, since it derives revenues from its food delivery service (Uber Eats) and an assortment of other smaller bets (like Uber Freight). It is worth noting this table while suggests that while some of Uber’s more ambitious reaches into logistics have not borne fruit, its foray into food delivery seems to be picking up steam. Uber Eats has expanded from 2.68% of Uber’s net revenues to 13.12%.

Often characterized as the largest IPO of the year, Uber will go public in May to fanfare and, potentially, that glorious day one pop that will solidify gigantic returns for early and preferred investors. Like any public offering, there will be an initial discomfort on behalf of the retail investors when Uber’s stock settles. But this conversation isn’t about the IPO, or Uber’s uphill battle to achieve profitability (at the expense of public transportation – according to critics). This is about the long-term potential of its delivery business. With the $100 million raise that may allow the $90-100 billion brand to further invest in long-term partnerships like the one with McDonald’s. Uber’s market performance will be tied to the value proposition of Uber Eats. And for companies like Postmates, though it has raised nearly $700 million, Uber’s post-IPO advantages will be a concern within their San Francisco boardroom.

In 2019, Uber’s key partner will be McDonald’s. If successful, exclusive restaurant relationships will begin to place Uber Eat’s delivery competitors in regrettable positions.

More than two-thirds of McDonald’s business is earned through its drive-thru operations. And internal figures suggest that nearly ten percent of many franchisee’s 2018 sales were attributed to third-party deliveries from: Uber, Amazon, Delivery Hero, Zomato, Postmates, Deliveroo, Swiggy, DoorDash, and Grubhub. Of these services, Uber is best positioned to compete for the long game. To accomplish this, McDonald’s will:

streamline kiosk and drive thru order response and processing

cut hourly human capital in favor of kiosks and third-party delivery

and speed up delivery by using artificial intelligence to speed drive thru and kiosk orders.

With this context, McDonald’s acquisition of Dynamic Yield shouldn’t be a shock to those who’ve followed these developments. I’ll summarize why a bargain-driven fast food chain like McDonald’s would pay $300 million to acquire an artificial intelligence company. McDonald’s revolutionized the kitchen. With Uber’s partnership, McDonald’s is aiming to revolutionize the speed of order processing and delivery while shifting labor costs to Uber.

To do this, store owners are on the hook for a redevelopment effort that will take time and trust between McDonald’s corporate and their franchisees. McDonald’s is essentially building infrastructure for omnichannel excellence at scale. With net sales being affected by smaller margins typical of third-party delivery, McDonald’s management is positioning to offset those shrinking margins by equipping store owners with artificial intelligence and automation to cut their own payroll liabilities. This, while increasing third-party sales from 10% to 30% per store.

With McDonald’s prioritizing technological redevelopment at kiosks and the drive thru, it casts a new light on the potential of a McDonald’s partnership with Uber Eats. And Uber will mostly benefit by establishing a growth path that may be as lucrative as the app’s digitally vertical restaurants (DVR). For Uber, DVRs may earn the company a higher margin than what’s typical but Uber’s partnership with McDonald’s will drive critical market share.

2PM summary:

Key takeaway no. 1: McDonald’s Corp will partner exclusively with Uber. Other delivery apps will no longer be able to sell McDonald’s products within their apps.

Key takeaway no. 2: McDonald’s Corp will invest and promote Uber’s value. With institutional support from one of America’s greatest consumer brands, retail investors will be assured that Uber is a long-term value despite its glaring profitability concerns.

Key takeaway no. 3: Uber will negotiate for more national restaurants to agree to category exclusivity. This will increase pressure on DoorDash, Postmates, and GrubHub to do the same.

On the night of April 14, Postmates earned a bit of social media buzz with an easter egg promo for HBO’s “Game of Thrones.” Founder and CEO Basti Lehmann retweeted praise from droves of users who admired the savvy brand gamesmanship. To celebrate the premiere of HBO’s last season of Game of Thrones, Postmates added an illustration of a dragon flying over your in-app mapping experience. It was clever and it will likely earn major media for the effort. But flying dragons are not trademarked, so it’s not clear that HBO had any role in the marketing promotion.

In this way, we’re witnessing another contrast between Uber and Postmates. One company is solidifying exclusive, long-term relationships with strategic growth partners. The other is still shifting away from driving growth with flimsier marketing and logistical decisions like featuring restaurants without signed agreements in place. Postmates is growing up and I remain a frequent user but it’s hard to ignore the infrastructure that Uber Eats is building, in anticipation of its May IPO. By capturing the most well-known restaurants in America, Uber Eats is positioning to be the preferred food marketplace of middle America. And it just might work.